Is this investment profitable?
A sum of $20000 is invested in equity shares of XYZ CORPORATION for a period of 10 years.If the market value of this investment became $51875 after 10 years and the interest is reckoned continuously @10 percent per year, show that the investment become profitable if it gives a shareholder a dividend yield of 3% per year for 10 years. Ans: Dividend of 3% of $20000=$600 =3792.72335(B)Present value of market value of $51875 after 10 years = Thus, the total present value calculated in (A) and (B)[22876.47] is greater than the initial investment amount $20000. So we can say investment of $20000 in XYZ CORPORATION is profitable.Are my calculations right?Let me know from this forum.
Re: Is my investment profitable?
Yes, your calculations are correct.
However, did you realise that using 10% annually (no compounding) means:
51875 / 1.10^10 = $20,000 present value (instead of 19,083.75).
And the present value of the dividends: 600(1 - 1/1.10^10) / .10 = $3,686.74
So why go to the contortions of compounding interest when looking at an estimate
over a long period (10 years), when all sorts of fluctuations can occur.
Btw, "compounding continuously" sounds GREAT....
but compare it to "cpd. daily" using a million dollars over 1 year:
A difference of $15.14 !!